Cashless Policy: Nigeria should emulate Kenya’s success- FDC

Nigeria’s cashless policy faces several challenges including poor network connectivity and debiting customers’ account twice.

The slow adoption of the Central Bank of Nigeria‘s cashless policy is beginning to worry finance experts, with some calling on the regulatory body to take a cue from Kenya’s success story.

The Central Bank, in January 2012, introduced the cashless policy with a pilot phase in Lagos, themed ‘Cashless Lagos’. It has since been extended to five more states,(Anambra, Ogun, Abia, Rivers and Kano) and Abuja in 2013. The regulatory body has emphasised that the cashless drive is not aimed at the eradication or replacement of cash but rather, a drive to provide safer and efficient alternatives of payment for “bank customers”.

The regulatory body has also highlighted its aims to reduce the cost of banking services and curb corruption. In the first year and a half of the cashless policy in Lagos, research reveals that non-cash payments increased by 20 per cent.

Despite this improvement, the cashless policy has faced several challenges including poor network connectivity, debiting customers’ account twice, high transaction charges, PoS machine malfunctions and other technical issues.

These challenges have discouraged customers and resulted in a slow adoption of the cashless policy, according to surveys. In addition, experts have highlighted that the cashless policy concentrates on the banked public (customers who have bank accounts) rather than the unbanked public or informal economy, which is estimated to be about 75 per cent of the population.

“In our opinion, the cashless policy is likely to be more successful if participation extends to the informal sector and the challenges encountered are minimized. One good way of achieving this is by introducing mobile banking under the cashless policy platform,” Financial Derivatives Company, a diversified financial institution, said.

“Kenya’s mobile banking model seems to have defeated the vast difficulties associated with the cashless transaction platforms; if employed by the Central Bank, mobile banking will cause the cashless policy to reach an unprecedented percentage of the unbanked in Nigeria” it added.

The mobile banking strategy

Mobile Banking is the provision and accessibility of banking and financial services with the help of mobile electronic devices. The services offered under this platform usually do include performing balance checks, cash lodgments and other basic transaction services.

Mobile banking can be viewed as an innovation that lowers trading costs, transaction time and allows for immediate financial transfers (credits and debits) by both the formal and informal sectors. It has the potential to drive financial inclusion by providing efficient transaction options and greater reach.

According to the firm, in the U.S. and other developed countries, payments via mobile phones are still weak and lagging behind due to different standards including near field communication, countless apps and various failed efforts at mobile wallets. However, in Africa, the lack of banking and other types of infrastructure have propelled the mobile payments initiative due to the wide adoption of mobile phone technology, despite the fact that the overwhelming majority of phones in Africa remain low- end feature phones.

“Nigeria can take a cue from Kenya where mobile money has been the most successful,” the firm said, highlighting the success story of Kenya’s M-Pesa.

Kenya’s mobile banking package launched by Safaricom in March 2007, has since become the world most successful implementation of mobile money services. In May 2008, M-PESA in Kenya had 2.7 million users and almost 3,000 agents. Five years later, M-PESA recorded slightly over 14.6 million active subscribers, processes an average of 80 transactions per second and handles transactions that contribute 31 per cent of Kenya’s $33.62 billion GDP, the firm said.

M-PESA, Kenya’s successful project, was initially designed to facilitate mobile repayment of microfinance-loans, reduce the costs associated with handling cash and thus make lower interest rates possible. However, after pilot testing, it was broadened to become a general money-transfer scheme that allows individuals to deposit, send, and withdraw funds from a virtual account on their cell phones, which is separate from the banking system.

Once an individual is signed up, money is paid into the system by handing cash to a Safaricom agent (typically in a corner shop selling airtime), who credits the money to the M-PESA account. Money can then be withdrawn by visiting an agent who acts as a bank cashier or through money transfer to others using mobile phones. The outcome of this is that M-PESA allows money to be sent more quickly, safely and easily than carrying cash in person. M-PESA is also seen as a useful retail payment platform.

“Borrowing from Kenya’s story, mobile banking remains the most feasible means to create a successful cashless economy,” FDC said, citing that in Nigeria, some banks have introduced the mobile banking platforms to their customers but it is not currently under the cashless policy framework.

“Mobile banking services have the potential to fast track the cashless policy process since it covers the informal sector and the issues encountered using the PoS machines are non-existent under the mobile banking platform. Also, mobile technology has close to 75 per cent penetration rate in Nigeria with prospects for growth. Crucially, one does not need a bank account to do mobile banking and it therefore has the potential of reaching over 80 per cent of the unbanked population and those at the lower end of income distribution”.

People stay unbanked for a number of reasons including insufficient funds/income, poor banking experiences in the past, for instance, with a mishandled account, overdraft fees, monthly maintenance fees, or minimum balances. Lack of appropriate identification, language barriers, intimidation and lack of understanding of mainstream financial services have also influenced people’s decision to remain unbanked.

“All these could be minimized under the mobile banking platform,” the firm said.

Despite the prospects, the firm said integrating mobile banking under the cashless policy framework in Nigeria would likely face some challenges.

FDC said that Kenya’s model was developed by a single mobile telecommunication company (Safaricom) focused on mobile banking services, hence creating Kenya’s only online bank with agents (who serves as cashiers) across the country. Besides, Safaricom also benefited from launching the service in a country with a banking regulator which permitted Safaricom to experiment with different business models and distribution channels.

“The major grey area according to the Central Bank of Nigeria is the ability to control the platform and the anticipated effect on monetary policy since consumers do not need bank accounts in order to use mobile banking services. The mobile banking platform in some sense creates another ‘bank’ which may be difficult to regulate. Therefore, the Central Bank may be unwilling to adopt the mobile banking platform under the cashless policy model,” the firm said.

However, this was not the case in Kenya as Safaricom enjoyed a good working relationship with the Central Bank of Kenya (CBK) and was given regulatory space to design M-PESA in a manner that fit its market without violating the provisions of the banking law.

“Although the Central Bank’s objective to improve the effectiveness of monetary policy may become slightly more difficult under the mobile banking platform, it is worth considering the Kenya model to achieve a higher success rate under the cashless policy,” Financial Derivatives said.